Cramer's 'Mad Money': Staying in the Game

Why jump back into the cyclicals at all? Cramer said the reason is simple. At the bottom, all of the earnings estimates have all to be cut, making the cyclicals' price/earnings ratios low. This, in turn, makes them look cheap and promotes the increased buying.

The First Hint

Avoiding losses, said Cramer, is another important lesson to learn. He said that one way to avoid huge losses is to pay attention to a stock's price/earnings multiple and look for multiple contraction, a period when the market decides it's just not going to pay a high premium for a certain stock.

Cramer said when a stock catches a case of multiple contraction, it only gets cheaper and cheaper, as the market decides it's willing to pay less and less for a company's future earnings. But, he said, investors needn't worry too much, as there is often time before the symptoms of multiple contraction set in.

Cramer used Whole Foods (WFMI Quote) as an example of multiple contraction. On July 31, 2006, Whole Foods, a high-flying, high-multiple stock, reported earnings with just a hint of negativity in their same-store sales growth. For the next two years, the stock just drifted lower and lower as investors decided Whole Food just wasn't worth the multiple they were giving the company.

Cramer said his bottom line is that investors need to sell high- multiple names at the first sign of a slowdown.

Protect Yourself

Cramer said his last rule for staying in the game is to know your broker. "Some brokers will rob you blind," he said, "and you're probably handing them your wallet."

Cramer explained that many amateur investors make the mistake of placing market orders, which get placed at whatever the current price of a stock is, rather than limit orders, which specify a price that the investor wants to pay.

Cramer pleaded with viewers to always use limit orders. He said that by using limit orders, investors can get way ahead of the pack, adding there's absolutely no risk in using them. Limit orders, he said, are the only way to know a broker's not cheating you.

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